The process of leaving a job can be a stressful one. If you are on your way to a new job, you will certainly have a lot on your mind. Unfortunately, one major need that you may overlook is what to do with your retirement savings.
According to Spencer Williams of MarketWatch, approximately 33 percent of workers left savings behind in their prior employer’s 401(k) plan when changing jobs. Doing so is a mistake for several reasons, especially when there are better options for what to do with retirement savings during a job transition.
Option #1: Stick with a previous employer’s 401(k) provider
Williams says that the vast majority of employees who leave their retirement savings behind in a previous employer’s 401(k) plan do so out of complacency. Only 27 percent stated that they stuck with a previous 401(k) option due to it being more advantageous.
Kathleen Elkins of CNBC warns that leaving retirement savings behind in a previous 401(k) plan can be extremely risky. Often, former employees are no longer able to contribute to the plan. If an employer switches 401(k) providers, former employees may be unable to log in to access their account.
Kate Ashford of CBS warns that some 401(k) plans are riddled with hidden fees. Workers who have left a job may not be privy to any new fees that providers add to a 401(k) plan.
Option #2: Withdraw money from a 401(k) account
It might be tempting to simply withdraw the cash from a previous 401(k) account. Doing so could potentially be even more damaging than leaving savings behind.
Withdrawing retirement savings from a 401(k) account triggers a 10 percent early withdraw penalty, according to Emily Brandon of U.S. News. This is in addition to the income tax that will be applied to the newly-withdrawn money.
Unfortunately, despite how risky this option is, it is not an uncommon one. Williams says that approximately 31 percent of workers have withdrawn money from their 401(k) accounts prematurely.
Option #3: Transfer funds to a new employer’s 401(k) program
Ideally, you will have a new job lined up before you quit your current job, and that job might offer a 401(k) plan right off the bat. Many financial experts warn that this is the exception rather than the rule.
Brandon says that many employees encounter a waiting period before they can opt into the 401(k) program at their new job. Michael J. Grossman of Investopedia says that employees should carefully compare their previous 401(k) plan with the current one offered, regardless of when 401(k) entry is first offered.
Brandon advises against having multiple 401(k) accounts at once. Instead, consolidate accounts to keep your retirement savings more organized.
Option #4: Transfer savings to an IRA
The option that most employees choose during a job transition period is an Individual Retirement Account. Arielle O’Shea of NerdWallet states that IRAs share many of the same benefits as traditional 401(k) programs.
There are two different kinds of IRAs generally offered: a traditional IRA and a Roth IRA. Traditional IRA accounts do not incur initial taxes upon deposit, whereas with a Roth IRA, you will owe taxes on the amount of money you roll over when you set up the account. Still, CNN states that Roth IRAs offer more flexibility, especially for retirees.
Workers can roll over savings from an IRA to a new 401(k) account when it is available, yet many workers stick with an IRA or Roth IRA until they are finally ready to retire, Elkins states.
When leaving one job for another, retirement savings are something that no one wants to leave behind. With the various financial options available, you fortunately won’t have to.